Government report talks up parallel imports

11/08/2011

A freeing up of shopping centre planning and zoning regulations; deregulation of trading hours; and a review of employee remuneration and work practices are the only three solid recommendations to come from the Productivity Commission‘s recently-tabled draft report into Australian retailing.
The report ‘Economic Structure and Performance of the Australian Retail Industry’ – examines ‘the implications of globalisation for the retail industry and the appropriateness of current policy settings.’

A somewhat more radical suggestion buried deep in the report is that Australian retailers consider parallel importation as a means of becoming more competitive with offshore online retailers. (Of which, more later).

When it comes to the GST exemption for private imports, the Productivity Commission adopted a distinctly unenthusiastic tone in conceding that the threshold should come down from the current level of $1000 (‘but only once this can be done cost-effectively’).

It then proceeded to devote more space in the report to why this is impractical than to any other single topic. Prime among these is that, under the existing processing systems for incoming parcels, the costs to process the extra parcels would exceed the additional revenue raised.

This is largely because the Australia Post/Customs systems are distinctly ‘last century’ – lots of manual handling and paperwork – which is not the case in other countries with lower tax-free thresholds.

The Commission is proposing that the Australian Government establish a task force to investigate lower cost approaches to processing in both the mail and courier systems, with a reporting deadline in 2012.

This seems designed to put the issue on the back-burner for 12 months or more while not putting the Australian retail sector offside.

The Commission played mischievously with the figures to support its essentially ‘do-nothing’ recommendation on GST exemption: It used the example of a $20 threshold to ‘prove’ that the cost of collection would far exceed the extra revenue brought in (even though no-one in the debate was demanding the threshold be dropped to $20). It then used a $900 threshold to show that it just wouldn’t be worth the trouble anyway.

What it studiously avoided was any examination of the economics of a $400 – 500 threshold – which is what advocates for Australian retailing were calling for.

BELOW: This Productivity Commission chart fails to show where collection costs intersect with revenues – we aren’t told what the ‘economically neutral’ (‘break-even’) level of tax-exempt threshold might be. Enough to send you grey!

The full draft report, which runs to several hundred pages, warrants more than a lazy regurgitation of the accompanying press release. For the rest of this article we will focus on the issue of international price differentials and the Productivity Commission’s lightly-veiled encouragement to the Australian retail industry to abandon local distributors and parallel import to better compete against offshore online retailers.

The Commission first conducted its own price comparison survey of 35 products ‘to determine whether significant differences exist between retailers and retailer-types’.

Prices were taken from a sample of Australian bricks and mortar (or multichannel) retailers, Australian online retailers (including shipping and delivery costs) and overseas online retailers (including shipping and delivery costs).

The comparisons show that for the majority of products examined, the cheapest price offerings were from online retailers rather than from Australian bricks and mortar stores (even after accounting for the shipping and delivery fees), with the majority of lower prices from international online retailers.

All goods (except for one) in the books, DVDs and music category had the cheapest price offering from international online retailers, with the price differential being 50 per cent or more compared with some Australian bricks and mortar stores. On the other hand, the computer and electronics category was mixed, with some Australian bricks and mortar retailers offering the cheaper prices (some even before accounting for shipping and postage costs).

The Commission looked at several digital imaging products and found that a Sony NEX-5 camera was cheapest from an offshore online source at $650 compared to $799 from an Australian online supplier. However a Canon IXUS 105IS was cheapest at an Australian bricks and mortar store ($170 compared to $188 from offshore online) and likewise a Kodak digital frame was $77 locally and $89 offshore online, while a Nikon Coolpix L23 was $99 locally and $116 offshore online. Freight costs would cut into the offshore online channel’s price advantage for lower-priced goods.

The report states that wholesale and retail margins are about the same in Australia, the UK and the USA, which challenges the perception that Australian retailers or wholesalers are gouging their respective customers.

When it came to consumer electronics, Australian average retail margins were 22 percent, the US, 23 percent, UK and Europe 31 percent, and global online 35 percent!

However within these averages there is significant variation, with large Australian retailers enjoying bigger profits than their international counterparts: ‘According to Citi Investment Research and Analysis (2011), Australia’s larger retail firms enjoy higher profit margins than their overseas equivalents.’

– So if average Australian retail margins are competitive, and large Australian retailer margins are high, it’s clear who is doing it relatively tough.

While margins might be competitive, Australian retail and Australian consumers are losing out because of high landed cost: ‘It should be noted that while the percentage margins on sales are similar, the absolute dollar margin on sales in Australia in many cases may be larger. This would occur if the landed cost or cost of goods that Australian wholesalers and retailers source from overseas is high compared to other countries. This may arise from the transport costs incurred in shipping products to and within Australia, or because of international price discrimination practised by overseas manufacturers and suppliers.’

International price discrimination, according to the Productivity Commission, ‘occurs when a single seller offers different prices for identical goods to buyers in different countries. This practice is a common and generally legal business strategy to maximise profit performance of suppliers.

This is, in classic marketing theory, ‘Charging What The Market Will Bear’, addressed astutely by economics wrier Ross Gittins in a recent article on retailing: ‘You maximise your profit by charging whatever price – high or low – is the most the people in each market or market segment are willing to pay.

‘Economists call this ‘price discrimination” and regard it as perfectly reasonable.’

Mr Gittins next point is critical:

‘Now here’s something the economists won’t tell you: people are willing to pay higher prices in Australia because that’s what they’re used to. People are willing only to pay lower prices in the US because that’s what they’re used to.’

The Productivity Commission spells it out: ‘Specifically, this discrimination is in the form of brand owners or international suppliers/manufacturers charging higher prices to Australian retailers relative to the prices they charge to similar retailers in other regions. These comparatively higher international supplier prices are then passed on to consumers.’

For example, Apple has been charging Australian consumers twice as much for music downloads as it does US consumers, and Adobe hits Australians with a 50 – 100 percent gouge on its software.

A number of submissions to the enquiry made the point that Australian retailers sourcing product through locally-based distributors are at a clear price disadvantage due to this kind of price discrimination, and the Productivity Commission report seems to accept that this is the reality.

However, it then makes an interesting suggestion as to how Australian retailers can become more competitive: The answer is the grey market!

In fact, The Productivity Commission sees retailer reluctance to abandon an orderly, established distribution system for consumer products in Australia as a real weakness:

‘The extent to which international price discrimination and unfavourable distribution channels’ [ie, authorised distributors] ‘are maintained also depends on the ability — and willingness — of Australian retailers to preserve such supply links. Given that consumers are now able to bypass local suppliers and retailers by purchasing directly from overseas suppliers, retailers may also have the ability to take advantage of similar approaches or use alternate and less costly supply channels to reduce final prices for consumers.’

– In our next issue, we’ll look at how the Productivity Commission report addresses the issue of high rental costs on Australian retailing.